Moderate Democrats are openly concerned about implementing expansionary fiscal policy in an economy that, for some, is already showing signs of overheating. Even though the economy is not at full employment, wages have already accelerated significantly, with the employment cost index (in its compensation component) up by an annualised 6% in Q3 (4.2% YoY).
In this context, moderate Democrats in the Senate will seek to roll back some of the provisions proposed by the House or even repeal them. Three spending items are in their sights: immigration spending, paid leave and adjustments to the SALT deduction (see box).
- The $120bn increase in immigration spending likely to be trimmed
- Paid leave (an extension of about $200bn) may have to be dropped to receive the approval of all Democrats
- The SALT deduction cap will probably have to be lowered and/or means-tested (see box)
The reconciliation procedure theoretically allows the bill to be passed by a simple majority. However, in the Senate, this procedure gives more power to the opposition, which has the means to slow down passage of the text and sow discord among Democrats. Each budget provision must be found to comply with certain budget rules (otherwise the provisions are dropped, this is the so called “Byrd rule”1). In addition, Republicans can filibuster, filing numerous amendments that can force votes on difficult issues (i.e., the “vote-a-rama”2).
Joe Biden wants the bill to be passed before Christmas, but there is a significant risk that it could be delayed until later in January, which would diminish its chances of being passed.
It seems to us, however, that the Republicans will not get their way. The Democrats will want to stick together. Their drop in popularity in the polls bodes for an uphill battle in the November 2022 mid-term elections. Current projections show that the Democrats will most likely lose control of the House. If they want to retain a majority in the Senate, they must avoid giving the Republican camp a victory.
With the bill currently before the Senate, this is likely to be the last budget measure that the Biden administration will be able to pass. Time is of the essence, as the election campaign will begin in January. The risk of a new epidemic wave should help cement the Democrats, as the Omicron variant threatens to further slow down aggregate demand next year (with less risk of overheating).